Having just reviewed the debt reduction report put out by Obama's fiscal commission, I must say that it's really not that bad.
I'm only going to address the Social Security portion of it here, since that's getting the most attention, and I may go back and address other portions of it later.
I'll quote from the presentation (which is just a slide show):
- Add a new special minimum benefit to keep full-career minimum wage workers above the poverty threshold.
- Wage-index the minimum benefit to make sure it is effective both now and in the future.
- Provide a benefit boost to older retirees most at risk of outliving other retirement resources.
- Gradually move to a more progressive benefit formula
- Index retirement age to increases in longevity
- Hardship exemption for those unable to work beyond 62
- Switch to a more accurate measure of inflation (chained CPI) for calculating COLAs
- Include newly hired state and local workers in Social Security
- Gradually increase the taxable maximum to capture 90 percent of wages by 2050
- Allow greater flexibility in how benefits are claimed
- Direct SSA to design a way to provide for the early retirement needs of workers in physical labor jobs
- Improve information on retirement choices
They also listed some additional options, one of which was to uncap the disability portion (1.8% of payroll) of the Social Security tax (this funds payments to disabled workers prior to retirement age).
The overall projected impact of these proposals (not including the optional ones) is projected as shown below:
What this graph is saying is that the proposals would slightly increase the payout to those in the lowest quintile over the current promised benefits, but it would significantly increase the payout over the supposed actual "payable" benefits. They are using a very conservative scenario where the payable benefits fall below the promised benefits as of 2037.
If you ignore the distinctions between what's projected to be payable and what's currently promised, their proposal slightly increases benefits for the poorest people and reduces benefits "progressively" for everyone else.
The first thing to point out is the proposal to increase the taxable maximum to capture 90% of wages by 2050. This is somewhat interesting. According to this report the Social Security payroll tax currently captures 86% of wages, with the remaining 14% being above the cap. It is projected that using the current system and current levels of income disparity growth that by 2050 the Social Security tax would only be capturing 82.5% of payroll, with the rest being above the cap.
Now, the call to change the formula so that 90% of payroll would be captured by 2050 is perhaps better than doing nothing, but its still a far cry from what should really be done, which is to remove the cap completely and to do it much more quickly than by 2050. It's something that should be done perhaps over 5 years, not 40 years.
Overall I would say that some of these benefit ideas are good ones, like creating a new minimum benefit, and developing new ways to insure that people in manual labor jobs can claim early retirement without a penalty, etc. I also think that the outlined reductions in promised benefits are mostly fine the way that they have laid them out as well, though perhaps a little too aggressive. It is true that right now benefits are scheduled to increase too much in my opinion and paying for these benefit increases only hurts workers right now.
However, I'm against increasing the retirement age for anyone, for multiple reasons. For one thing, it obviously would mean that fewer people would see any benefits, because if you die before you collect then you essentially get nothing. For another thing, I think that even with exceptions for people in manual labor jobs, the net effect would be to push more elderly people onto other government assistance programs in their late 60s, which might make Social Security more solvent, but wouldn't help the overall budget.
Here is the other issue when talking about Social Security and "reducing the debt". There is currently $2.5 trillion in the Social Security "trust fund". Now regardless of what you think about the trust fund, the fact is that this represents $2.5 trillion in taxes that were collected from payroll incomes below the taxation cap, primarily over the past 25 years.
Over the past 10 years roughly $150 billion has been put into the trust fund every year, meaning that Social Security has collected an excess of roughly $150 billion every year for the past 10 years.
The money in the "trust fund" has been "borrowed" by the federal government every year, so what this means is that this excess $150+ billion has been used like general revenue to fund the federal government. That $150+ billion has represented roughly 6% of total federal revenue each year and that 6% comes entirely from low and middle wages. What this means is that the Social Security surplus has been acting like an offset to the federal income taxes, and the Social Security tax is a highly regressive tax that only hits low and middle wages, so what's been happening for the past 25 years is that low and middle wage earners have been subsidizing federal revenues. Without that $150+ billion coming in from social Security every year we would either have had to borrow that money from other sources, or raise other taxes, and if we had to raise other taxes, almost certainly it would have come from income taxes, which are more progressive and therefor this has acted as a stealth tax cut for the wealthy this whole time.
We are currently discussing the expiration of the Bush tax cut for the top 2%, which are projected to cost $700 billion over the next 10 years, but consider that the Social Security excess that has been paid over the past 10 years has been in excess of $1.6 trillion. This really amounts to a $1.6 trillion tax cut on the wealthy, or at least around a $1 trillion tax cut on the wealthy, over the past 10 years, paid for entirely by the poor and middle class, on wages under ~$100,000 a year (as of 1999 the cap was $72,600). Over the past 10 years the wealthy have had their taxes subsidized by the poor and middle class by roughly twice the amount of the Bush tax cut that we are currently debating, and in fact this subsidy has been going on for the past 25 years, not just the past 10.
So, when we talk about changing the Social Security benefits to "reduce the debt", what this really means is defaulting on the $2.5 trillion that's in the "trust fund". It means changing the benefits so that instead of paying back the $2.5 trillion over the next 40 years, less than $2.5 trillion will be paid back. This is advocated as a means of avoiding tax increases on high incomes (since surely where the bulk of the burden would lie), but the fact is that this $2.5 trillion represents a $2.5 trillion tax subsidy to on high incomes over the past 25 years in the first place, so if its not paid back by taxes on high incomes then what's really happened is that we just used a tax on low incomes only as a stealth income tax for all these years, and that's that.
This, among other reasons, is why fully removing the cap on the Social Security taxes is essential. Simply changing the formula so that the cap rises a little faster is not enough, and simply removing the cap on the disability portion of the Social Security tax is not enough.
While Social Security is a good system overall, it is currently a highly regressive system that is putting an undue burden on the poor and middle class. The Social Security payroll tax is the single largest tax that most Americans pay on their income, and it only hits income under ~$100,000.
What really needs to be done to fix Social Security is:
- Remove the cap on the Social Security tax
- Apply the Social Security tax to all forms on income, not just payroll income (capital gains, etc.)
- Modestly reduce the rate of benefit increases, something between the current formula and what this deficit commission has proposed
- Reduce the tax from its current rate of 12.4% down to around 6%
Not only should the tax be applied to all income for that reason, but given that almost a quarter of national income is realized via capital gains, by not taxing this income it forces the tax on payrolls to be higher. If the burden can be spread across more of the national income then the tax can be lower.
So in conclusion, the proposals on Social Security put out by Obama's deficit commission (aka cat food commission) actually are not that bad. In fact I would call them mostly an improvement over the current state of affairs, however I strongly disagree with raising the retirement age and I disagree with making the benefit formula significantly more progressive (weening the middle class off of Social Security). Likewise, the recommendations don't go nearly far enough in expanding the tax base of Social Security, and indeed its recommendations appear to be designed to stave off larger efforts to fully remove the Social Security taxation cap and more broadly expand the tax base.